State of the housing market in the UK as rate rise looms

The base rate has increased from an historical low position of 0.10% to 1.75%, with further rises in the near future widely expected.

While the next Monetary Policy Committee (MPC) meeting was scheduled to take place on September 15, it was postponed for a week to allow a period of mourning following the death of Queen Elizabeth II – instead taking place today, September 22, at 12 noon.

The last increase, which pushed rates to 1.75%, marked the sixth consecutive rise since mid-December 2021. It is also expected that, today, a seventh consecutive increase is likely to be the verdict. As a result, many experts in the housing industry have expressed their concern for what this means for the market.

“At the current point in time, the markets predict that the base rate could potentially rise to around the 3% mark this year, and then higher still as we move into next year,” said Steven Melbourne, chief risk officer at Chorley Building Society.

Read more: Bank of England postpones base rate decision

He noted that the Bank of England’s task has become increasingly difficult, not only with challenging domestic economic considerations to take into account, but also with difficult international monetary and geopolitical factors to consider too.

“All of which have the potential to materially impact interest rate expectations both upwards and downwards,” he added.

The recent increases in base rate have seen mortgage rates increase from record lows to their current positions. As such, the housing market has been greatly impacted, with many buyers putting off making a purchase until the economic conditions of the market reveal some degree of respite. 

All things remaining equal, he explained that this would be expected to result in increased interest rates for a large proportion of fixed rate borrowers when their current fixed period comes to an end.

“This will coincide with higher inflationary pressures, particularly higher energy costs,” he added.

As such, Melbourne believes it is looking increasingly likely that the UK government will introduce several forms of fiscal support measures that would be expected to assist homeowners, particularly with their rising energy costs.

Will Hale, chief executive of Key, added that escalating mortgage rates, stemming from the consecutive increases to the base rate, had resulted in a slowdown in house price rises.

This, he believes, will heighten the affordability challenge many potential buyers face - however, he does not think the market will endure a crash any time soon. 

“That said, I do think people will be more cautious before moving up or taking their first steps on to the property ladder given ongoing economic uncertainty, which may impact confidence and encourage people to manage outgoings more carefully,” he said.

He explained that this, in turn, may help to cool down some of the parts of the market in the UK where demand has outstripped supply, but noted that any adjustment is likely to be moderate.

Read more: House prices expected to fall in 2023, but…

“We need to remember that, fundamentally, we are a small island that has failed not only to build enough homes, but also enough of the right type of home to meet the needs of a changing demographic,” he said.

In the later life lending market, Hale explained while downsizing may be the right answer for some customers, many older people struggle to find properties which are suitable for later life living.

“There are a number of areas where government intervention is likely going to be needed as households navigate this cost-of-living crisis and the housing sector is one that should not be ignored,” he said.

Potential levers such as introducing a stamp duty holiday for ‘last time’ buyers and extending the Help to Buy Scheme which ends in October are options, Hales believes, that may be considered.

However, Hale explained that there is no silver bullet to maintaining the health of the housing market, and ultimately it is wider factors such as inflation, unemployment and energy prices that he believes will have the greatest bearing on the sector.